Alecta, Sweden’s biggest pension fund with $110 billion of assets under management, has fired its chief executive Magnus Billing following nearly $2 billion of losses incurred from last month’s US banking crisis. The pension fund is also beginning an enquiry into how it manages equity, due to report in the summer.

Alecta, known for maintaining a very concentrated equity portfolio, has also begun reducing risk from its large stakes in companies far from its home market, focused particularly on holdings in the US.

In a statement, Alecta said a strategic review will explore how it will conduct equity management going forward, headed up by Ann Grevelius, now acting head of equity.

Alecta began investing in SVB in June 2019 and made its last investment in November 2022. The pension fund is the fourth largest shareholder in SVB. It also had investments in Signature and First Republic Bank.

management change

Grevelius is a member of Alecta’s board, a position she will resign during her time as head of equity. She was previously head of SEB Investment Management and will take over from Liselott Ledin who has left her post as head of equity following 28 years at the pension fund. The statement said the review is expected to be ready for board analysis in good time before the summer.

Deputy CEO Katarina Thorslund has been appointed acting CEO, and the recruitment process to find a new CEO will begin immediately. In the meantime, Ingrid Bonde will support the organization as chair of the board.

Alecta head of asset management, Henrik Gade Jepsen, is currently on long-term sick leave due to complications following a Covid infection. He is expected to have recovered and be back in the role after the summer. Until he returns, Kerim Kaskal has been appointed as acting head of asset management. Kerim Kaskal has extensive experience in asset management, including as head of asset management at AP3.

Losses

The statement said  that following large losses in three American niche banks last month – SVB, Signature Bank and First Republic Bank – management and the board have worked intensively to isolate the losses and work through the processes within asset management to understand how the situation arose.

Alecta’s management has made the assessment that the investment decisions were within the framework and mandate established by the board. The board shares that assessment and welcomes the Financial Supervisory Authority’s review of the course of events, said the statement.

SVB was the largest bank since the 2008 financial crisis to collapse when California regulators closed it, sparking market disruption and heightened stress across the banking sector. It led to Credit Suisse, already in trouble with losses, being forced to merge with UBS by Swiss regulators to prevent wider contagion.

The announcement of Billing’s departure follows attempts to reassure in the fund’s latest annual report, published last week. Billing wrote how the spike in interest rates had caught the investor unaware.

“Since 2016, we have invested in three banks in the US with completely different business models and with operations in different parts of the country. These investments developed well during the first years, but in 2022 the situation worsened as interest rates rose. Although we saw that there were challenges ahead, our assessment was that they could be resolved. We, like most analysis houses and credit rating agencies, misjudged the rapid negative developments for US banks that occurred in March 2023,” he wrote, adding.

“The impact on pensions is small, partly because the loss corresponds to less than 2 percent of our managed capital.”

AP2, Sweden’s SEK 400 billion ($38.8 billion) buffer fund, recently divested its allocation to three Chinese asset managers overseeing an allocation to China A shares despite spending many years carefully building up the successful stock picking portfolio. High points of the strategy included the portfolio returning an average alpha of 30 per cent in 2017.

The decision to build an externally managed Chinese equity allocation back in 2013 was a marked change of tack from AP2’s quant approach across global developed and emerging market equity. The only other fundamental allocation is to Swedish equity where market knowledge and expertise is close at hand.

Now the allocation to Chinese companies  is back under that quant umbrella where it accounts for 20 per cent of the pension fund’s 11 per cent allocation to emerging markets and where investment decisions are drawn from models fed by a huge data pool. Around 70 per cent of AP2’s assets are invested in risk assets of which 50 per cent is equity and 20 per cent is real assets including property and forestry.

The decision to divest the mandates was driven by the buffer fund’s quest for efficiency and cost savings which has led to around 80 per cent of assets now being managed inhouse including all public markets, explains CIO Erik Kleväng Callert who joined AP2 in May 2022.

“Managing money in house allows you to be lower cost, more dynamic and more flexible in your investment process,” he says. “We can’t invest in China with the same fundamental approach we have in our home country. It would be impossible to have a fundamental approach to managing Chinese equities from Sweden.”

The shift in strategy also comes against the backdrop of AP2’s integration of key themes amongst which is growing geopolitical tension.

“Of course, we remain concerned about developments in China, and follow it really closely,” he continues. “Geopolitical tensions are emerging that will impact many of our allocations and assets but we still have a fair share of Chinese equities.”

In the quant allocation AP2 seeks the highest risk adjusted returns via a multi-factor approach that includes value, quality, low volatility and ESG factors that favour the most sustainable companies in line with AP2’s Paris-aligned benchmarks.

Brown opportunties

Another key trend influencing strategy is the climate transition. Much of the investment team’s time is spent understanding how to adjust the portfolio, getting to grips with not just the financial risk from climate change but how the companies AP2 owns will impact the environment and climate change going forward.

It calls for a particular approach to investment that is more active than quant.

“You cannot be 100 per cent passive in ESG. You must have some kind of smart beta; you have to have a more fundamental process,” says Callert. “We have a lot of ESG data and research on every company we own. If a company doesn’t do the right thing, we will look into it and we will potentially sell it off.”

AP2 mitigates climate risk in the portfolio by avoiding investments in high emitting sectors in line with Paris-alignment and its own emission targets. It also actively invests in solutions like new energy infrastructure, green bonds where the funds are earmarked for solutions, and has a large allocation to forestry.

But Callert, who draws on years of experience in sustainable investment from previous roles at PRI Pensionsgaranti, PP Pension & Insurance and Nordea Life & Pensions, says ESG integration is far from straightforward.

“We must be careful to always look at all our investments from a risk and return perspective. Investments must have a good business case as well as support the climate transition. Sustainable development doesn’t just involve green investments, investments must have the right risk return.”

Carefully picking winners and avoiding stranded assets is leading the team to research cheaper brown investments in the hope they grow in value as they transition their operations.

“We are thinking of investing in businesses that have yet to become green, i.e. companies that are focusing on transitioning their operations. This might include energy companies that are focusing their investment budget on switching from fossil fuels to renewable energy or steel companies developing new processes,” he says. “We see a value if you can buy them a little cheaper because many investors don’t like brown companies. We can buy them and fix them and this is a good option.”

For all AP2’s long term view, stable asset allocation and risk levels and determination to ignore short term market volatility, Callert will tilt the portfolio to a short term view or dislocations.

Today that includes opportunities in the undervalued Swedish Krona, currently cheap compared to its long-term equilibrium.

“We can change our exposure to FX in the portfolio so today we have a little less exposure to foreign currencies because see them as overvalued against the Swedish krona,” he concludes.

 

Recent returns in Oregon Public Employees Retirement Fund’s (OPERF) $13 billion real estate portfolio are linked to a combination of factors including a strategic pivot to multi-family and industrial exposure and the growth and performance in the fund’s boosted allocation to separately-managed accounts which have improved alignment and allowed significant fee savings.

The portfolio’s performance is also attributable to its large allocation to core, income-driven real estate at a time of sustained, strong core performance. OPERF’s predominantly core allocation means investments are at the lower end of the risk spectrum with a focus on high quality, lower leverage, relatively liquid assets in established markets.

A strategy that dates from 2016 when the investment team began to gradually de-risk the allocation, liquidating opportunistic investments in favour of more sustainable, long-term portfolio and reduce embedded risk.

“We have achieved outperformance without taking outsized risk,” said Christopher Ebersole, investment officer, real estate, at Oregon State Treasury which invests Oregon’s state funds including the $95.4 billion OPERF portfolio, speaking in a recent council meeting.

For the period ending September 2022 the portfolio returned 20.54 per cent earning a 10 year return of 11.21 per cent. The real estate portfolio has generated $2.4 billion in net cash flows since 2010.

Still, looking ahead, Ebersole flagged that the allocation will be increasingly buffeted by higher financing costs and challenges around price discovery characterised by sizeable bid ask spreads in most transactions. He also noted that OPERF has substantial uncalled capital commitments to evergreen structures (like openend funds and separately managed accounts) as managers remain selective on the acquisition side, waiting to capitalise on distressed and discounted buying opportunities.

Around 70 per cent of the portfolio is in evergreen structures meaning distributions from income will become an increasingly large component of future portfolio cash flows.

“The market reached an inflection point in late 2022 with the 4th quarter ushering in an expected near-term trend of meaningful write downs across sectors due primarily to rising financing costs, increased cap rates and uncertainty around commercial tenant demand,” said board documents.

Positively, 2022 brought a resumption of travel for the real estate team, resulting in a return of in-person manager meetings, enabling analysts to better assess assets.

Approvals and fees

Last year the team approved nine real estate commitments totalling $1.75 billion. All 2022 commitments represented continuations or expansions of existing manger relationships in a reflection of the investment team’s high degree of conviction in its manager roster and the ability of these groups to execute.

Also underscored by the emphasis on evergreen partnerships which has meant that the frequency of new partnership underwriting has fallen.

According to board documents, last year’s core commitments resulted in management fees that averaged a 40 per cent discount to average fee structures for comparable open ended vehicles.

Non-core commitments included management fees that averaged a 15 per cent discount to average fee structures for comparable closed-end vehicles.

Targeting risk

The portfolio targets a long-term net return 50 basis points above the NFI-ODCE (26 largest equity open ended real estate funds in US) and aims to reduce risk among the portfolio’s investments through diversification by strategy, investment size, geography, and tenure.

The riskier corner of the portfolio comprises an allocation to value add and opportunistic strategies that use higher leverage and focus on investments driven by exits. Higher interest rates have particularly impacted these strategies, the council heard.

Real estate is currently within OPERF’s policy range of 7.5 per cent to 17.5 per cent but above the midpoint range of 12.5 per cent. The council heard how future discussions will review a strategy that currently holds onto core assets long term, rather than sell them as well as how to build international exposure to increase diversification.

DEI and ESG integration in the portfolio remains a work in progress as Oregon develops these themes collaboratively with its managers.

Investors are currently facing the end of uncertainty around assumptions they have made for decades, and need to shore up their portfolios with greater inflation protection, more active management, and by fostering innovation, according to chief strategist at the Investment Management Corporation of Ontario, Nick Chamie who spoke to Amanda White in the Fiduciary Investors Series podcast.

 

 

What is the Fiduciary Investors series?

Through conversations with academics and asset owners, the Fiduciary Investors Podcast Series is a forward looking examination of the changing dynamics in the global economy, how decision making should adjust for different market pressures and how investors are positioning their portfolios for resilience.

The much-loved events, the Fiduciary Investors Symposiums, act as an advocate for fiduciary capitalism and the power of asset owners to change the nature of the investment industry, including addressing principal/agent and fee problems, stabilising financial markets, and directing capital for the betterment of society and the environment.

Like the event series, the podcast series, tackles the challenges long-term investors face in an environment of disruption,  and asks investors to think differently about how they make decisions and allocate capital.

Brunel Pension Partnership is making cost savings of £34 million ($41 million) per year, two years ahead of its initial target of saving £27.8 million a year by 2025. The partnership’s latest annual report and financial statements reveals that Brunel is saving almost four times the costs it incurs thanks to the management fees it is able to negotiate because of its responsible investment expertise.

“Two years ahead of schedule, Brunel is saving around four times the costs we incur via the management fees we negotiate.,” writes Denise Le Gal, Chair, in her Forward to the report.

Brunel says its success reflects two defining characteristics. The professionalism and efficiency of its approach to pooling and the negotiating power it gains from leadership in sustainability. More than 80 per cent of client AUM has been transferred into the pool.

While the specific targets on cost savings were set by Brunel Pension Partnership, the broader ambitions of pooling were defined by the UK government when it launched the pooling process. The UK’s 100-odd small local authority pension schemes grouped into eight bigger pools six years ago, tasked with creating economies of scale, cutting costs and broadening access alternative investments.

Infrastructure investment

“Private markets have been an important part of the cost-saving jigsaw,” continues le Gal. At Brunel, infrastructure is a core focus, and the partnership is in its third cycle of allocating to private market portfolios. Through these portfolios, it has targeted a range of infrastructure projects and currently has around £819 million invested in the asset class which has delivered £6 million in cost savings.

“We launched Cycle 3 of our private markets portfolios in 2022. Private markets offer us a particular opportunity to construct and direct the new economy, one that delivers both the Net Zero transition, and the Just Transition needed to make it happen,” says chief executive Laura Chappell.

Other 2022 highlights include co-launching a new series of Paris-aligned benchmarks with FTSE Russell. Brunel also added two new mandates to its Sustainable Equities portfolio.

Small is beautiful

Brunel has also launched a bespoke local impact portfolio for client fund Cornwall Pension Fund. The £115 million Cornwall Local Impact Portfolio (its smallest ever portfolio) is the first LGPS multi-asset portfolio to target local impact.

Brunel was able to negotiate mandates with two leading global managers – one for affordable housing, the other for renewables – and to harness the portfolio to target those priorities in a county where both poverty and climate change are significant challenges.

Brunel recently launched a Climate Stocktake and published a new Climate Change Policy.

“The twin challenges of transition finance and accelerating global change are enormous. By delivering on the goals set by our partnership, we will not just benefit our clients and their members. In the long-term, we will demonstrate to the wider industry to our belief that RI is indispensable to achieving healthy long-term returns,” concludes Chappell.

High inflation and low risk premiums are making it difficult for asset owners to meet their return targets, according to the investment heads of several major global funds who participated in the 2023 CIO Sentiment Survey.

The return target expectations were particularly testing for those whose mandates limit large allocations to illiquid assets, but the CIOs said that improved fixed income returns will bring some relief.

Commenting on the findings of the 2023 CIO Sentiment Survey, a collaborative effort between Top1000funds.com and Deloitte Consulting business CaseyQuirk, heads of three major funds in the Netherlands, Australia and the United States explained why funds were taking a wait-and-see approach despite historic market shifts, and why the resource crunch inside funds has become so acute.

The survey found most asset owners were planning ‘no change’ in allocation shifts as they waited for clearer market signals, despite drastic market changes not seen in a generation. It also found resources and time were stretched, with CIOs saying their internal teams were under-resourced and they faced personal time constraints.

In the Netherlands, PGB Pensioendiensten, with around €35 billion in assets, has a minimum target to meet the nominal return of its liabilities, explained chief executive Harold Clijsen (pictured), and its “ambition is to meet inflation.”
But this has become a major challenge with 5 per cent inflation expected for 2023, Clijsen said, especially with risk premia in major equity markets currently around 2.5 per cent.

“So mathematically it is hardly possible to meet required returns,” Clijsen said, noting higher risk premia can be found in the market but typically in illiquid investments.

Having a “risk-off posture” at a time when markets have a relatively low risk premia would leave funds behind the industry benchmark, and therefore be a risky move in itself, he said, leading most investors to try to balance a relatively low risk premia with a dynamic approach to gain some extra return.

“So looking forward, probably the best is to navigate between the chances of lower inflation and maybe lower rates in the long run, and having still some risk budget available should markets come down due to further inflation and interest rate spikes in the near future,” Clijsen said.

The abundance of CPI+ targets among Australian funds explains why some Australian CIOs are not confident in meeting their targets, said Andrew Lill, chief investment officer of A$67 billion Australian superannuation fund Rest.

“When inflation is high but asset class returns moderate, it provides a challenge,” he said.

As a result of the market backdrop, many were planning ‘no change’ in their asset allocations “because it is not clear at this stage whether taking more risk, or de-risking, is the right course of action as markets are currently very data driven,” Lill said, noting funds were remaining broadly diversified and agile in the meantime.

“A wait-and-see approach to seeing what the data tells you is potentially the right approach in this market,” Lill said.

Increasing investment costs did not help with the pressure funds are facing. While the CIO Survey data had significant dispersion among respondents about the trajectory of investment costs, in comparison to previous years there were fewer respondents managing to get costs down, and greater numbers seeing costs increase.

This was likely due to the widespread shift into private assets, according to Chris Ailman, chief investment officer at $306 billion fund CalSTRS in the United States.

“I’m still very focused on lowering costs and doing so more efficiently,” Ailman said. “I can’t explain that trend on why we would be seeing costs rise, other than the shift from public market securities into private market securities which are inherently more expensive.”

Fortunately, improved fixed income and cash returns would bring some relief, said Ailman.

While he did not foresee a “massive asset allocation change,” he noted the 80/20 portfolio had been creeping away from fixed income towards an 85/15 allocation, but it was now returning to its prior 80/20 setting.
“Fixed income was becoming a smaller and smaller part of everyone’s portfolio, but now that it will have 4-6 per cent return, people will be putting in more money,” Ailman said.

Under-resourced, short of time

The survey also found fund CIOs were feeling resource-constrained, and were looking to hire more staff, gain assistance from investment consultants, and gain efficiencies.

Under-staffed internal teams and a shortage of talent were selected as top concerns by 58 per cent of respondents, and there was a large jump compared to previous years in respondents noting ‘personal time constraints.’

Clijsen said this resource crunch inside funds was most likely a combination of additional work resulting largely from ESG regulatory requirements and ESG data issues, and resourcing not being at full capacity following the pandemic, against a backdrop of general labour shortages.

“Also, work-private split may have changed following Covid, [with] people feeling the need for more private time,” Clijsen said.

In Australia, asset owners have been tackling market uncertainty, greater internalisation and greater regulatory oversight while looking to build improved technology into their investment process, Lill said.

“The above has been happening during the pandemic, which in Australia has meant zero immigration of core skills, so the pressure on finding new skilled workforce has been acute,” Lill said. “Given the above, a lot of the pressure to change has been placed on leaders to deliver, and therein lies the time constraints challenge.”
Ailman noted a similar situation in the United States, noting “the pandemic experience made younger generations in particular think more about their career and lifestyles, and turnover has increased across the industry.”

But he also pointed to drastic changes to work habits driven by technology, notably how cell phones had “broken through the work/life boundary.”

“I have a pretty disciplined 8.00am to 5.00pm lifestyle but see staff doing work late at night, on weekends, I’m not asking them to do that but now that they’re at home, suddenly the…natural boundaries we used to have to help with work/life balance have disappeared,” Ailman said.

With the home now the office for many people, it will take “self-discipline and technology” to recognise the problems and return balance to peoples’ lives, he said.

With regards to flexible work arrangements, not a single respondent of the survey is running a fully remote operation anymore, with 40 per cent requiring their employees to be in the office 3-4 days a week and 35 per cent requiring 1-2 days. Most of the remainder have relatively flexible policies, with only 6 per cent requiring employees to be in the office 5 days a week.